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The concepts of unitary groups and combined reporting allow for States to tax the income of...

The concepts of unitary groups and combined reporting allow for States to tax the income of an entity that does not have nexus with the State. States assert that this is a mechanism to prevent taxpayers from distorting business income by locating profitable operations in low tax jurisdictions, and low profit or loss making activities in high income states. For example, locating Marketing and Legal services in a separate legal entity with no income in State A and only nexus in State A, while locating profitable sales operations in State B (with no nexus in State A) that does not have corporate income tax. Do you think this is fair to taxpayers? Should States be allowed to disregard the legal structure of a business? Be sure to explain, why or why not.
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Corporations have been allowed to make use of this mechanism to reduce their tax liability. States on the other hand are interested in collecting more taxes. States often think that by going in for combined reporting their share in taxes will increase resulting in more income for the state coffers. However one should consider here that the actual taxes might fall in case of combined reporting. say for example if one has to apportion taxes based on sales revenue, then in case of unitary filing sales made in the state needs to be assessed. But in case of combined reporting inter group sales to member entities needs to be adjusted. States also have to consider the payroll and other items before arriving at the tax liability or share to be collected from combined reporting.

From corporation point of view the combined reporting carries the risk of over allocation of taxes in a particular state as compared to separate filing in each state. The result is that corporations find it difficult to make proper tax filing and planning. Again the corporations are taxed irrespective of the state where income is actually earned and where it is taxed. Thus combined filing might be convenient from state point of view but for corporations it is not beneficial.

Thus we can conclude that states should not be allowed to disregard the legal structure of business, it is not useful for both the parties.

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